Morgan Stanley, Anand Rathi and Geojit Financial Services, who suggested recognizing profits at ₹80 per share in September, I now recommend buying on dips at ₹60. Morgan Stanley’s “buy” rating has caused Suzlon Energy stock to hit the upper circuit for two consecutive trading sessions.

However, Ventura Securities continues to maintain a “sell” rating with a price target of ₹50, saying: “Suzlon Energy is a great company but not at a great price. »

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While all brokers agree that Suzlon Energy is in an ideal position in India’s energy transition, they disagree on the right price for this turnaround stock.

The bull JM Financial has a price target of ₹8, while Morgan Stanley reduced its price target by ₹78 to ₹71 and Geojit Financial Services aims to ₹68. The bearish Ventura Securities has a price target of ₹50. These targets were last updated on November 19.

Why is there such a big gap between the two analysts’ price targets?

The case of Suzlon Energy

Analysts have set price targets for Suzlon Energy based on earnings and revenue estimates for the next three years (FY24-27). They are bullish on the stock for five reasons.

• A solid order book
• Lower competitive intensity
• Suzlon holds 32% market share in wind energy
• Wind power in India expected to reach 500 GW by 2030
• Good execution and favorable government policies

But this represents both an opportunity and a threat for Suzlon Energy. As a specialist wind energy company, Suzlon is well positioned to harness the wind energy revolution. However, it is also affected by pauses in wind projects and subsidies.

Largest order book ever recorded

Suzlon currently has its largest order book since 2017 – 5.1 gigawatts. A strong order book provides revenue visibility. Himanshu Mody, CFO of Suzlon Group, in a interview withCNBC-TV18in February, said the company averaged about ₹6 crores per megawatt. With this, you can make a rough estimate of revenue after adjusting for execution risks such as delays in land acquisition.

Suzlon’s history is marked by extreme order and revenue volatility. During the 2017 financial year, Suzlon recorded its best financial performance ever after a significant restructuring: ₹2,479 crore operating profit after a loss of ₹283 crores in FY16.

However, the government ended feed-in tariffs for wind power projects and introduced tenders in early 2017. Strong competition reduced electricity tariffs to a level that made projects unviable wind energy. This policy change had a ripple effect and Suzlon’s revenues fell by ₹12,714 crores in FY17 to ₹2,973 crore in FY20 as orders dried up. It is ₹A net profit of 852 crores transformed into a ₹Net loss of 2,692 crores during this period. This is why the stock is sensitive to order volumes.

Coming back to FY24, the company has a strong order book which should keep it busy over the next couple of years. Over the past three years, revenue has grown at a compound annual rate of 25%, and analysts expect this trend to accelerate. Geojit Financial Services expects wind turbine (WTG) shipments to grow at a CAGR of 67% between FY24 and FY27. Ventura expects its revenue to grow at a CAGR of 47.6% over the same period.

The wind in the sails

Such bullish revenue expectations can be explained by India’s transition to renewable energy. According to the Central Electricity Authority (CEA), India needs 100 GW (up from 42 GW in FY23) of wind power capacity to achieve the optimal renewable energy capacity mix by 2030 .

As the largest wind turbine manufacturer in India with a market share of 32%, Suzlon is well placed to benefit. But achieving this ambitious goal comes down to investments in wind energy, which are cyclical. So far, there is a lot of enthusiasm for investments in renewable energy.

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Morgan Stanley expects the addition of wind power in India to generate an order backlog of 32 GW (worth $31 billion) between FY25 and FY30 for wind power equipment makers. original (OEM). The brokerage firm expects Suzlon to generate a total sales volume of 7.15 GW between FY25 and FY27, and its market share to increase to 35-40% by FY27.

Little competition

Morgan Staley also sees little competition for Sulzon because there aren’t many purely specialized wind turbine manufacturers. A direct competitor is Inox Wind, a smaller company that is expected to report its first full-year net profit in FY25. The company also has a strong order volume of 2.9 GW and is improving its execution of 376 MW in FY24 to expected 800 MW in FY25 and 1.2 GW in FY26. Better execution will drive growth of its income.

While Suzlon is a leader in wind power, Inox Wind is growing rapidly and could still provide competition for Suzlon if things get tough. But for now, competition from Inox Wind is not a concern.

The government’s wind policy

In addition to new wind energy additions by the government, C&I companies are also adding wind capacity to meet needs. renewable wind energy purchase obligation (wind RPO) until 2030. In addition, the accelerated depreciation benefit, concessional customs duty exemption on certain components of wind power generators and a production-based incentive program for wind projects commissioned before the March 31, 2017 are driving the adoption of wind energy.

However, the company is exposed to changes in government policies. The 2017 policy change plunged Suzlon into three years of losses (FY18-FY20). Such vulnerability has made investors cautious and analysts perplexed about the valuation.

A cautiously optimistic valuation

Coming back to Suzlon Energy stock being well priced, the key lies in the price-to-earnings (PE) ratio. A review of historical data reveals huge discrepancies in PE ratios. There are periods when there is no PE ratio because the company has made losses. In seven of the last 12 years, Suzlon has posted a net loss.

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High debt and order volatility have weighed on Suzlon’s profits for several years. The company sold some businesses and raised equity capital to pay down debt. In August 2023, the company became debt free.

With debt concerns now out of the picture, favorable government policies will boost earnings and revaluations, according to Anand Rathi.

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Considering its volatile past, stable present and promising future with exposure to external factors, is Suzlon a buy at a PE ratio of 89.2? There’s no point looking at its median PE due to years of losses. Can the stock return to its January 2024 PE ratio of 155x and maintain it? Inox Wind is trading at a PE ratio of 130, showing that there is a bullish trend towards renewable energy stocks.

The essentials

Analysts expect Suzlon’s earnings to grow: Geojit expects earnings per share to grow at a CAGR of 61% and Ventura expects net income to grow at a CAGR of 66, 2% between FY24 and FY27. If these fundamentals hold, Suzlon stock could grow.

It remains to be seen whether Suzlon can keep investor optimism and interest high over the long term. For now, even analysts are divided on the stock.

For more analyzes like this, read Profit impulse.

Note: We relied on data from Screener.in throughout this article. Only in cases where data was not available did we use an alternative, but widely used and accepted, source of information.

The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. This is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly intended for educational purposes.

Puja Tayal is a seasoned financial writer with over 17 years of experience in fundamental research. In her articles, she provides a good mix of comprehensive and well-researched information about the work of a company.

Disclosure: The writer and his dependents own the shares discussed in this article.